CHALLENGES OF FINANCIAL AND ACCOUNTING TREATMENT OF CRYPTO TOKENS

Abstract

Initial coin offering (ICO) is an entirely new method of raising funds based on blockchain technology. ICO implies the company's decision to issue cryptographic tokens in exchange for fiat currency (legal means of payment) or cryptocurrencies to a network of early adopters or development team members. The leading idea of this concept is to give ICO startups access to the financial resources necessary for funding their projects. What an initial public offering (IPO) is in traditional finance, ICO is in the decentralized finance world. Yet, unlike actions, issued tokens can have multiple uses and features and perform various functions. The situation is further complicated by the lack of a unique globally accepted classification of crypto tokens. However, in practice, they are most often classified according to their fundamental economic functions. According to this categorization, the following basic types of tokens are distinguished: utility, payment (or currency) and security (or asset) tokens. In addition to the three types listed, some tokens, known as hybrid ones, combine several functions of these three basic categories. It is essential for the company of the issuer of the crypto token to carefully compile the White Paper, synonymous with the prospectus for the initial public offering, and to precisely understand what it offers to investors. The financial and accounting treatment of crypto tokens also depends on the rights and obligations arising from the White Paper, i.e. the issued token type. There are certain conditions under which tokens issued by regulators could be deemed securities, with the necessary reminder that there is no single global view on this significant issue. The paper primarily aims to indicate when and under what conditions crypto tokens can be considered securities, i.e. what are the critical challenges of financial and accounting treatment of crypto tokens.